Regulators are running out of patience with banks that refuse to curb risky lending.
After issuing their latest in a series of warnings on underwriting standards Thursday, the heads of two federal agencies said they may force some banks to hold more capital or pay higher deposit insurance premiums.
Acting Comptroller of the Currency Julie L. Williams said all the jawboning has been an attempt to warn banks. "If we don't see the kind of corrective actions necessary, then we will move on" to more forceful steps, such as classifying loans, requiring extra loss reserves, and demanding banks hold more capital.
Federal Deposit Insurance Corp. Chairman Donna A. Tanoue said the question of raising premiums on the riskiest banks is "a top priority."
Charging some banks more for the government's guarantee "might provide a modest financial incentive to improve their business practices," she said. "We'd be putting the money where our mouth is."
In separate interviews, both regulators said they are concerned about the impact an economic slowdown would have on bank loan portfolios. Bankers cannot continue to ignore the red flags examiners are raising, they said.
Industry consultants predicted the agencies are done talking.
"I think we're in for a new round of intervention on privacy, safety and soundness, a whole host of issues," said Karen Shaw Petrou, president of ISD/Shaw Inc. "The regulators will say, 'We tried it your way and that didn't work. No more Mr. Nice Guy.'"
Bert Ely, president of Ely & Associates in Alexandria, Va., said now is the time to make the riskiest banks pay more for the government's backing.
"This is when deposit insurance premiums ought to be rising," he said. "They ought to rise when the risks are being taken-not when the loan losses show up."
For their part bankers cheered the agencies' tough talk.
"If you actually found a banker who was still in need of being warned, you would want to take his pulse," quipped Paul M. Dorfman, immediate past chairman of Robert Morris Associates, the trade group for lenders. "I'm not saying they should stop warning. It's part of their function."
Mr. Dorfman, an executive vice president at Bank of America, also endorsed more stringent enforcement actions.
"If they really saw a bank that was not behaving prudently, I think they have a duty to take actual action," he said. "It's bad for the whole economy when people are making loans which are ... overly risky."
Dorothy M. Horvath, executive vice president of National City Bank in Columbus, Ohio, agreed.
"The tough part in this industry is you have a lag time before you see tangible signs of credit deterioration," she said. "You do the underwriting today, but you pay the price ... over the term of the loan."
On Thursday, the Office of the Comptroller of the Currency said banks, buckling to competition, are easing underwriting standards for the fourth straight year.
The FDIC said the effects of Asia's economic crisis are being felt in key sectors of the U.S. economy, including oil, chemicals, agriculture, and manufacturing. "The potential weaknesses in some markets and easing of underwriting standards could pose problems for banks if the economy falters," the FDIC warned in a series of regional reports.
In the comptroller's 1998 survey of credit underwriting practices, the agency said price concessions are the most prevalent form of easing. But more banks are also reducing collateral requirements, stretching out repayment terms, and liberalizing financial covenants.
Regulators are more concerned about commercial lending than consumer credits. The OCC is focusing particularly on syndicated loans, middle- market lending, and real estate portfolios. The one exception on the retail side, the agency said, is home equity lending where standards continued to slide.
Ms. Williams said examiners are taking examples of poor loan underwriting directly to national banks' boards of directors.
"The thing that we'll do next is to make sure that we identify-and management of the institutions are presented with-very specific examples in their own portfolios of the type of problematic structurally defective loans," she said. "What we've been trying to do recently is to get more focused on what's going on in individual institutions, taking a step beyond simply public statements about industry trends."
In October the Comptroller's Office will launch an on-line data base to track the loans examiners have flagged as defective, Ms. Williams said.
